Lifetime allowance changes

22 February 2016
On 6 April 2016, the lifetime allowance (LA) will reduce from £1.25 million to £1 million for tax years 2016/17 and 2017/18.

Who does this change affect?

Anyone with pension savings over or close to £1 million and their beneficiaries.  HMRC has estimated that there are around 55,000 individuals expected to have pension benefits worth between £1 million and £1.25 million in 2016/17.1

What are the changes in detail?

The LA will reduce to £1 million for tax years 2016/17 and 2017/18.  In addition, the LA will increase each year by the increase in the consumer prices index (CPI) from 2018/19 onwards.  The relevant CPI is the CPI for the year to the previous September. If this addition does not create a multiple of £100, the LA will be rounded up to the next £100.

Transitional protection

Two further protection options will be available for those either with pension benefits already above £1 million, or those who think their benefits will be above £1 million by the time they take them. 

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These two new protection options are:

  • fixed protection 2016 (FP16)
  • individual protection 2016 (IP16). 

These will work in a very similar way to their 2014 equivalents. 

Those with FP16 will have a personal LA equal to the greater of £1.25 million and the LA.  Individuals wanting to rely on FP16 should ensure that no further pension contributions are paid into DC schemes or no further benefit accrual in a DB scheme above a ‘relevant percentage’ occurs after 5 April 2016. 

Those with IP16 will have a protected LA equal to the value of their pension savings on 5 April 2016 but not greater than £1.25 million.  These individuals can continue saving into their pensions although they could face a lifetime allowance charge on the excess above the LA. 

How to apply for FP16 or IP16

HMRC has stated that in July 2016 a new online self-service for pension scheme members to apply for FP16 and IP16 will be introduced.  Anyone wanting to rely on either FP16 or IP16 before the new online system is available should contact HMRC in writing with details of their intentions.   

Unlike FP2014 and IP14 there is no deadline for applying for FP16 and IP16.

Individuals will be able to apply for both FP16 and IP16 and where this is the case, FP16 will take precedence.  If FP16 is lost, the individual will revert to IP16.

 

Sources

1 Reduction of pensions lifetime allowance, HM Revenue & Customs, published 9 December 2015.

About the author

Fiona Hanrahan

Senior Product Insight and Technical Support Analyst

Fiona has worked in financial services since leaving university in 1998 and has experience of working in technical support and product design as well as working as a financial planner. She’s a Chartered Financial Planner and a Fellow of the Personal Finance Society.

Last updated: 22 Feb 2016

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